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Weekly IRS Roundup May 25 – May 29, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 25 – May 29, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 26, 2020: The IRS and United States Department of the Treasury issued proposed regulations to provide guidance on federal income tax withholding on certain periodic retirement and annuity payments under IRC § 3405(a).

May 26, 2020: The IRS and Treasury issued final regulations clarifying the reporting requirements under IRC § 6033, generally applicable to tax-exempt organizations.

May 26, 2020: The IRS Practice Unit titled Taxation on the Disposition of USRPI by Foreign Persons was updated to clarify that publicly traded stock of a corporation continues to not be US real property interests (USRPI) if held by a 5% or less shareholder. The 5% threshold was increased to 10% only for real estate investment trusts (REITs) under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).

May 27, 2020: The IRS and Treasury issued Notice 2020-41 to modify prior IRS notices addressing the beginning of construction requirement for both the production tax credit for renewable energy facilities under IRC § 45 and the investment tax credit for energy property under IRC § 48.

May 27, 2020: The IRS announced that some Economic Impact Payments (EIPs) will be sent to taxpayers in the form of a prepaid debit card that will arrive in a plain envelope from “Money Network Cardholder Services.”

May 28, 2020: The IRS announced that taxpayers will be able to file Form 1040-X, Amended US Individual Income Tax Return, electronically this summer. Previously, Form 1040-X was only accepted through the mail.

May 28, 2020: The IRS and Treasury issued proposed regulations regarding the credit for carbon oxide sequestration under IRC § 45Q.

May 29, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.




Court Rules That Wind Farm Did Not Provide Proof of Development Fee to Receive 1603 Cash Grant

On June 20, 2019, the United States Court of Federal Claims published its long-awaited opinion in California Ridge Wind Energy, LLC v. United StatesNo. 14-250 C. The opinion addressed how taxpayers engaging in related party transactions may appropriately determine the cost basis with respect to a wind energy project under the Internal Revenue Code (IRC). Central to the case was whether the taxpayer was allowed to include a $50 million development fee paid by a project entity to a related developer in the cost basis of a wind project for purposes of calculating the cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). Section 1603 allowed taxpayers to take a cash grant in lieu of the production tax credit of up to 30% of the eligible cost basis of a wind project. The eligible cost basis under Section 1603 is determined in the same manner as under Section 45 for purposes of the investment tax credit (ITC). The Justice Department disagreed with the taxpayer’s position that the development fee should be included in the cost basis for calculating the Section 1603 cash grant. The Justice Department argued that the development fee was a “sham.”

The court agreed, and held for the government. The court’s opinion focused on the taxpayer’s failure to provide evidence that the payment of the development fee had “economic substance.” Indeed, the court was troubled that none of the taxpayer’s witnesses could explain what was actually done to earn the $50 million development fee. Other than a three‑page development agreement and the taxpayer’s bank statements identifying the wire transfers for payment of the development fee, which started and ended with the same entity, the court found that the taxpayer provided no other factual evidence to support the payment of the fee. Indeed, the court pointed to the taxpayer’s trial testimony, which the court found lacked the specificity needed to support the development fee. Because the taxpayer failed to carry its burden of proof and persuasion, the court concluded that the taxpayer was not entitled to include the $50 million development fee in the cost basis of the wind project for purposes of computing the Section 1603 cash grant.

Importantly, the court did not, however, rule that a development fee paid to a related party is not permitted to be included in the cost basis of a facility for purposes of determining the Section 1603 cash grant. Instead, the court simply ruled that the taxpayer failed to provide it with sufficient proof that in substance the taxpayer performed development services for which a development fee is appropriately considered part of the cost basis of a facility for purposes of determining the Section 1603 cash grant.

Practice Point: In court, the plaintiff has the burden of proving its entitlement to the relief sought. Before filing a case, it’s best to make sure that you have all of the evidence you need to prove your case. Without substantial and [...]

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Analysis of Energy and Tax Proposals in the 2018 Budget Proposal

President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.

Read the full article.




Inversions and Debt/Equity Regulations Top Treasury’s 2016–2017 Priority Guidance Plan

Yesterday, the US Department of the Treasury (Treasury) released the 2016–2017 Priority Guidance Plan (Plan) containing 281 projects that are priorities for Treasury and the Internal Revenue Service (IRS) during the period July 2016 through June 2017. The Plan contains several categories of topics, starting with consolidated returns and ending with tax-exempt bonds. The Plan also contains an appendix that lists more routine guidance that is generally published each year. Treasury and the IRS will update and republish the plan during the next 12 months to reflect additional items that have become priorities and guidance that has been published during the year. The public is invited to continue to provide comments and suggestions as guidance is written throughout the year. (more…)




Investment Tax Credit Lessee Income Inclusion Guidance Issued

New Internal Revenue Service temporary regulations provide guidance on the income inclusion rules that apply when a lessor elects to treat a lessee as having acquired investment credit property under Treas. Reg. § 1.48-4. As expected, the new temporary regulations also provide that a partner of a lessee partnership cannot increase its basis in its partnership interest for this income inclusion.

Read the full article.




IRS Revises Recent Begin Construction Guidance

On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.

The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:

A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.

Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.




IRS Issues Guidance on the Beginning of Construction Rules for Renewable Projects

The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.

Read the full article.




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